Large Plans Fret About Target Returns, Funding, Risk Management

June 7, 2005 ( - The biggest potential obstacle in the path of large plan sponsors is how to produce their target returns in a low-return market though improving funding status and asset-liability risk management also rank high on their list of worries.

A news release from JPMorgan Asset Management said the firm’s recent survey found that over 50% of respondents described themselves as less than 95% funded (42% of corporates and 68% of public plans). Average portfolio allocations were similar for public and corporate plans, with both maintaining a mix of approximately 63% equity, 27% fixed income and 10% alternatives, on average.

The poll also found that corporate plans are greater users of private equity and hedge funds while public plans have a greater allocation to both public and private real estate, according to the news release. Furthermore, plan sponsors’ median expected three-five year return on assets is 8% (8.4% for corporate and 7.5% for public plans).

However, despite the search for better returns, the survey found that large plan sponsors are almost all measuring success against market benchmarks (99%) and or peer groups (78%). Some plans are taking a multi-dimensional approach – with 38% of public plans using a liability benchmark (44% of corporates) and 28% using an absolute return yardstick.

Breaking Up Total Return

Not only that, but more than 40% of large plans currently distinguish between the beta (market based) and the alpha (skill based) components of total return in deciding on portfolio objectives and measuring performance, according to the news release.   Fourteen percent of respondents are considering making the distinction between alpha and beta, while 45% said they are not considering adopting this strategy.

The research explored three potential avenues for beefing up returns: investing in a broader range of assets, shifting to more active investment management, and employing innovative strategies and tools.

Diversification of risk (73%) was the main motivation cited for any change of asset allocation practice, followed by enhancing returns (65%) and hedging liabilities and inflation (around 50%).   Of those plans concerned with diversifying risk (91 plan sponsors), 66% are looking to private real estate, 60% are looking to emerging markets equity and 63% are examining inflation protected instruments (TIPS).

The primary difference coming out of the survey between corporate and public plans, according to the news release, is that corporate plans are more interested in commodities, hedge funds, long-only absolute returns and tactical allocation strategies. Meanwhile, public funds favored emerging markets equity, high yield and public real estate.  

The survey likewise found that more than half of plan sponsors were using or considering using absolute return strategies (56%). Of those plans familiar with the concept, portable alpha strategies are being employed or considered by more than one in two plans surveyed (55%).  

Finally, while most plan sponsors intend to maintain their current active and passive equity allocations, public plans in particular (with an average passive allocation of 41%) seem to be shifting towards more active management styles and loosening their benchmark constraints.

The survey examined the investment practices of 120 of the largest 350 US defined benefit pension plans. The findings include responses from both public and corporate plans. The survey was conducted for JPMorgan Asset Management by Schulman, Rona & Bucuvalas, Inc. (SRBI), a research firm.